Folks Approaching 70 with NO (0) Stock Exposure - How to Secure Guarenteed Income?

[highlan875]

And of course our specialty Annuity Ladders

Considering the detailed scenario and prerequisites you’ve shared, the couple’s financial plan in retirement should largely focus on maintaining the capital and ensuring a steady flow of income while keeping the risk minimal. Here are a few ideas in line with the outlined conditions:

1. Fixed Deposits & CDs: Continuation with Certificate of Deposits (CDs) would be one simple way to preserve the capital and generate some returns. They might explore longer-term CDs for potentially higher rates, keeping the FDIC insurance in mind and possibly using different banks to stay under the $250k/$500k limits.
2. Municipal Bonds: Investing in high-quality municipal bonds or municipal bond funds could be an option for the taxable account, as they often provide tax-free income and are generally considered low-risk, especially if sticking with high-rated entities. This might be slightly more complex than CDs, but with some guidance, it could be a prudent option.
3. Immediate Annuities: Even though there is hesitation regarding annuities, an immediate annuity could provide a guaranteed stream of income for life, reducing longevity risk. They might choose to allocate a portion (not all) of their assets to an immediate annuity to further secure their monthly income.
4. TIPS: Treasury Inflation-Protected Securities (TIPS) could be considered for a portion of the portfolio to help protect purchasing power against inflation, as they are backed by the U.S. government. The principal of a TIPS increases with inflation and decreases with deflation.
5. Real Estate: Investing in a low-risk, income-producing real estate, such as certain rental properties or real estate investment trusts (REITs), could also be an option for diversification and receiving a stable monthly income.
6. Bond Ladders: Creating a bond ladder with high-quality bonds could also be an option to manage interest rate risks and secure a steady income. A bond ladder staggers the maturity of your bonds, so you’re not exposed to interest rate changes all at once.
7. High-Yield Savings Accounts: Placing a portion of funds in a high-yield savings account for short-term needs could also be a viable option, though the returns might be relatively low, it offers high liquidity and safety.
8. Consult a Financial Advisor: Since the couple is not very familiar with bond markets and fixed income assets, it might be beneficial to consult with a fee-only financial advisor who can guide them through the intricacies of certain investment vehicles, ensuring they are aligned with the couple’s risk tolerance and income needs.

The importance of diversification cannot be overstated. Even within a conservative investment strategy, spreading the investments across different vehicles (keeping the bulk in low-risk options) might protect the couple against various types of risks and offer a balanced approach to maintaining and slowly growing their nest egg.

It’s crucial to tailor any strategy to the couple’s unique needs and comfort levels, ensuring they can enjoy their retirement without financial stress.

 

[Sunset]

I'm not an interest(ing?) person , but couldn't OP simply buy a mix of CD's, Treasuries, and actual TIPs and I-bonds (after November).

The I-bonds go for 30 years and pay inflation + fixed % , They are cashable after 1 year, but the limit per year would limit the number deposited to the accounts each year.
OP could buy unlimited amount via the gift choice.

I see inflation as a real killer of savings, so TIPs and I-bonds would be a simple rough solution for it.

 

[davidfin]

If it was me and I had the same desire (I do not) to disregard the stock market, this is probably the best historical opportunity to make your desires work. I’d build a 25 year bond ladder of A/A corporate bonds in 5 year increments with a yield north of 6%. If that’s too risky, make it treasury bonds. You’ll lose a few tenths of yield but it’s the safest on the planet. It’s what underwrites FDIC.

 

[calmloki]

I dipped a toe into the T-Bill market.....
-- You can re-invest T-bills for up to two years. That means you can set your 13 week T-bills to automatically reinvest 7 times.....

I wasn't aware there was a limit on the number of times you could repurchase T-bills. Or is that a # limit imposed by Fidelity for their auto-invest feature?

I started buying 26 week T-bills last year. Got close to filling a six month ladder with a purchase per week - 22 T-bills in all, all for the same amount. Meant that almost every week I was ordering a new T-bill every Sunday evening to replace the one that would mature and fund the purchase the next Thursday. This was at Vanguard. Just moved all the T-bills to Fidelity, being seduced by the lure of auto-reinvest and haven't made my first purchase there yet.

Anyway, The idea was that by having a T-bill mature every week we would be able to handle any surprise major expenses pretty much immediately, while the discount amount would be accruing on a weekly basis for normal expenses. Far as other income, we have no pensions and piddling tiny SS. Still have rental income coming in, though I grumble about it and wanna sell. Several owner carried property sales paying us monthly. Have some stocks, but they just do whatever. We're in the 74 age range and while the desire for guaranteed income is strong we just do the best we can in the moment.

 

[jldavid47]

+100 already made that mistake... (as I said in another related thread, it's hard to fix stupid) But I'm back to about where I want to be now with my surplus cash. (Almost) I've learned to love SWVXX

Treasury bills are also very liquid and pay more than money market funds at the moment. I prefer them in our taxable account because they are state tax advantaged which makes the effective spread between them and SWVXX even wider.

 

[donheff]

Just turned 75 and DW approaching 71, we have complacently stuck with our simple portfolio of index funds heavily weighted to equities to pass on the bulk to the kids. Seeing many of you who's opinions I have long respected looking into bond ladders as you get older and have won the game, has prompted me to come out of my slumber and pay a little attention.

The current interest rate environment does make it attractive to build a somewhat "guaranteed" fixed income stream to meet our modest income needs or to cover DWs substantial RMDs. These iShares iBond ETFs sound like they substantially simplify the bond ladder process.

How do I evaluate the risk ratio among the three classes of bonds they offer. Treasuries I get. View them as a low risk "as 'guaranteed' as you can get" income stream, but what about corporate and high risk? I understand that they present more risk but how much? Is the increased risk a direct ratio of the rate of return vs treasuries? Is a diversified group of high yield bonds a prudent fixed interest investment for a couple whose risk profile is high (i.e. pensions, SS, and LTC meet all essential needs)?

 

[jldavid47]

The current interest rate environment does make it attractive to build a somewhat "guaranteed" fixed income stream to meet our modest income needs or to cover DWs substantial RMDs. These iShares iBond ETFs sound like they substantially simplify the bond ladder process.

Bond funds are not bonds and diversifying into bond funds of varying duration and type is not laddering. This has been covered on these forums many times over the years. If you want a quick overview of building a bond portfolio, you can start here:

https://www.schwab.com/learn/story/how-to-build-bond-portfolio

Laddering articles from Fidelity and Schwab are also a useful start:

https://www.fidelity.com/viewpoints/investing-ideas/bond-ladder-strategy

https://www.schwab.com/fixed-income/bond-ladders

A bond ladder does not have to be a complicated or time consuming task. In fact you can set it up so it only has to be managed annually.

There are many resources out there that can help you gain an understanding. Spend a little time and do a little research.

 

[Yipper]

Bond funds are not bonds and diversifying into bond funds of varying duration and type is not laddering. This has been covered on these forums many times over the years. If you want a quick overview of building a bond portfolio, you can start here:

https://www.schwab.com/learn/story/how-to-build-bond-portfolio

Laddering articles from Fidelity and Schwab are also a useful start:

https://www.fidelity.com/viewpoints/investing-ideas/bond-ladder-strategy

https://www.schwab.com/fixed-income/bond-ladders

A bond ladder does not have to be a complicated or time consuming task. In fact you can set it up so it only has to be managed annually.

There are many resources out there that can help you gain an understanding. Spend a little time and do a little research.

Actually... you are slightly mistaken regarding the iShares iBonds family of ETFs. They aren't open ended bond funds. They are target maturity funds that hold bonds that mature in the target year and then at the end of that target year they liquidate and close the fund.

For US treasuries or TIPS they are maybe just a convenience. For corporates they are actually a very easy way to be very diversified vs. picking a portfolio of individual bonds.

 

[donheff]

Bond funds are not bonds and diversifying into bond funds of varying duration and type is not laddering. This has been covered on these forums many times over the years. If you want a quick overview of building a bond portfolio, you can start here:

Yes, while I am pretty ignorant about bonds I have read the threads over the years and realize my bond funds, whether mutual or ETF are not the same as owning bonds. I accepted that but now I am interested in a new set of ETFs that purport to be different and seem to be drawing the attention of people here who know more than me about bonds.

Actually... you are slightly mistaken regarding the iShares iBonds family of ETFs. They aren't open ended bond funds. They are target maturity funds that hold bonds that mature in the target year and then at the end of that target year they liquidate and close the fund.

For US treasuries or TIPS they are maybe just a convenience. For corporates they are actually a very easy way to be very diversified vs. picking a portfolio of individual bonds.

Thanks Yipper. This is essentially what I have taken away from the earlier discussions. As a fan of easy, I am interested in the iBonds products, and I welcome more information concerning whether they are suitable for the conservative fixed approach being discussed in this thread. I am also curious about the relative risks of these somewhat diversified collections of corporate and high yield bonds.

 

[pb4uski]

Actually... you are slightly mistaken regarding the iShares iBonds family of ETFs. They aren't open ended bond funds. They are target maturity funds that hold bonds that mature in the target year and then at the end of that target year they liquidate and close the fund.

For US treasuries or TIPS they are maybe just a convenience. For corporates they are actually a very easy way to be very diversified vs. picking a portfolio of individual bonds.

+1 the ETFs that we are referring to are target maturity bond ETFs. The portfolio have the same defined year of maturity and in December a terminal distribution is made to owners and the fund is over. So it functions like a bond in that it matures, but because it is a fund it is more diversified, which is especially useful for corporate bonds, municipal bonds and high-yield bonds and for Treasuries and TIPS is you like the convenience.

 

[ShokWaveRider]

I am still struggling with this. Still looking at CDs, MYGAs and such like.

 

[pb4uski]

I am still struggling with this. Still looking at CDs, MYGAs and such like.

Struggling with what?

 

[tulak]

I’ll refer to what I posted in post #15.

Build a TIPS ladder and live life, assuming you’re ok with 95k/year of guaranteed income for 30 years.

You might not be maximizing, but you won’t have to worry about inflation or a reduced standard of living.

The only part to be careful is to hold until maturity for all purchases, otherwise you might have to sell at a loss. If that’s a concern, then hold a certain amount in short-term treasuries, maybe build a 5-year ladder with 24-52 weeks treasuries.

All of this is easy to do at Vanguard or Fidelity.

 

[ShokWaveRider]

I guess I really do not understand Tips deeply enough. Not sure where the "inocome" actually comes from and how consistent it is.

 

[tulak]

The income comes in the year they mature.

I keep it simple and don’t count TIPS interest. If I need 80k real income in 2030, then I buy 80k of TIPS today with a maturity in Jan 2030. This way I’m guaranteed that 80k of real income in 2030.

Of course, you’re still getting interest on your TIPS every six months, but for me that’s an added bonus. You can use that to BTD or reinvest in treasuries.

What’s nice about this approach is that you’ve protected yourself from inflation and in the worst case will likely track nominal treasury yields for similar durations.

I also do this in tax sheltered/deferred accounts. In taxable accounts, you will pay taxes on the inflation adjustment, aka the phantom tax. But this isn’t much different than paying on CD interest that’s reinvested.

 

[pb4uski]

I guess I really do not understand Tips deeply enough. Not sure where the "inocome" actually comes from and how consistent it is.

The income comes in the year they mature.

I keep it simple and don’t count TIPS interest. If I need 80k real income in 2030, then I buy 80k of TIPS today with a maturity in Jan 2030. This way I’m guaranteed that 80k of real income in 2030.

Of course, you’re still getting interest on your TIPS every six months, but for me that’s an added bonus. You can use that to BTD or reinvest in treasuries.

What’s nice about this approach is that you’ve protected yourself from inflation and in the worst case will likely track nominal treasury yields for similar durations.

I also do this in tax sheltered/deferred accounts. In taxable accounts, you will pay taxes on the inflation adjustment, aka the phantom tax. But this isn’t much different than paying on CD interest that’s reinvested.

The "income" that tulak refers to is really the maturity value which is designed in a TIPS ladder to be what you invested plus inflation. So if you need $10,000 of 2023 $$$ income adjusted for inflation for 5 years you would buy a $10,000 TIPS maturing in 2028. If inflation averages 3% over that 5 years then at maturity you will receive $11,600 ($10,000*(1+3%)^5)... in addition you also would have received semi-annual coupon payments for the coupon rate applied to the par... these days between 1.5% and 2.0%.

In that scenario, you would withdraw $11,600 maturity value from your IRA for spending.

That's the general idea.

Assuming that the TIPS are held in a tax-deferred account then the income on your tax return would be the entire $11,600 tIRA withdrawal.

 

[tulak]

Yes, the income I was referring to is your inflation adjusted principal that you get after the TIPS mature.

Thanks for the clarifications pb4uski.

 

[Slim11]

Ok, so , i have some stock exposure and am in a simmiler situation , just 20 years before you. While my 457, isnt that large, it will be in 20 years. But I fear the mandatory distributions. So maybe take some out now, a little each year. Only gives you 3 years before your mandated. Then move that money elseware. I am looking at bonds to minimize taxes, but dont understand them also. Not much help, but your in a good place.